Money & Banking study guide

Limits on competition uncontrolled competition

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Limits on Competition: uncontrolled competition promotes failure that will harm the public 6. Restrictions on Interest Rates Major differences between financial regulation in the US and abroad relate to bank regulation Ch. 3 // What is Money? To economists, the word money has a different meaning from income or wealth . Money is anything that is generally accepted as payment for g&s or in the repayment of debts Currency : paper money and coins. Checking account deposits are too Wealth : total collection of pieces of property that serve to store value; not just money but bonds, stock, art, land, furniture, cars, houses Income : a flower of earnings per unit of time Money serves three primary functions 1. Medium of Exchange : avoids the problem of double coincidence of wants that arise in a barter economy and thus lowers transaction costs and encourages specialization and the division of labor a. Barter economy – one without money b. Transaction cost – time spent trying to exchange g&s 2. Unit of Account reduces the number of prices needed in the economy (that would need to be considered), which also reduces transaction costs 3. Store of Value : repository of purchasing power over time; but performs this role poorly if it is rapidly losing value due to inflation a. Liquidity : the relative ease and speed with which an asset can be converted into a medium of exchange; money = most liquid asset b. Hyperinflation : periods of extreme inflation; inflation rate exceeds 50% per month The payments system has evolved over time. Until several hundred years ago, the payments system in all but the most primitive societies was based primarily on precious metals. The introduction of paper currency lowered the cost of transporting money. The next major advance was the introduction of checks, which lowered transaction costs still further. We are currently moving toward an electronic payments system in which paper is eliminated and all transactions are handled by computers. Despite the potential
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efficiency of such a system, obstacles are slowing the movement to a checkless society and the development of new forms of electronic money. Payments system : method of conducting transactions in the economy Commodity money : money made up of precious metals (ex: gold) Fiat money : “fake” money; printed on paper and secured by no real collateral Check: instruction from you to your bank to transfer money from your account to someone else’s account when she deposits the check Electronic payment: Internet E-money : money that exists only in electronic form (ex: debit card; store-value card) Smart card : computer chip that allows it to be loaded with digital cash from the owner’s bank account whenever needed E-cash : used on the Internet to buy g&s The Fed Reserve System defined two different measure of the money supply – M1 and M2. These measures aren’t equivalent and don’t always move together, so they cannot be used interchangeably by policymakers. Obtaining the precise, correct measure of money does seem to matter and has implications for the conduct of monetary policy.
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